Purchasing a home can be a daunting process. This is especially true for those who are looking to buy their first property as the differences in renting and owning can be stark, especially to those who are unprepared for the costs involved. Any program that could ease the transition into home-ownership for first time home-buyers is worth considering. So what do you need to know about FHA Loans?
This is a loan that offers a significantly lower down payment, is insured by the Federal Housing Administration (FHA), and is issued by federally qualified lenders.
The FHA program was born in the 1930s as a reliable way to home-ownership after the Great Depression. To date, the program remains an extremely popular path to owning a first home.
Down payments and closing costs remain a major hurdle for those looking to own a home. Borrowers with a good credit rating can secure these loans with as little as a 3.5% down payment, while less credit-worthy borrowers will pay 10% down.
In the past, borrowers were required to put a 20% down payment towards the value of the loan. While in some cases, lending requirements have loosened from that number, the fact remains that owning property can still be out of reach for many prospective borrowers, especially those with low to moderate incomes.
This can be the result of various issues, such as being new to the work force, or having bad credit through poor financial judgment. Thus, many lenders are hesitant to take on the risk with those who simply have no history of home-ownership.
While a positive credit score and a reduced down payment are major factors of an FHA Loan, other requirements exist that determine who can qualify for the program.
Anyone wanting to participate in the program must have a credit score of at least 580 to take advantage of the 3.5% down payment rate. A lower credit score does not necessarily negate the possibility of an FHA loan, but will raise the down payment rate.
A valid Social Security number and be a lawful US citizen of legal age. A borrower’s work history is also important; thus, they must be able to prove they have been with the same employer for at least the past two years.
Under the guidelines of FHA, the loan can only go towards a primary residence and borrowers must obtain an appraisal from an FHA-approved lender. Further, in terms of upkeep and repairs, the property must meet certain appraisal standards. If not met by the seller, these costs will be incurred by the borrowers at closing.
Besides a low down payment and fewer hurdles for borrowers who have an imperfect credit score, an FHA loan is also unique in that it’s also an “assumable” mortgage. This means any future, potential buyer can take over the seller’s home loan, taking advantage of what would then be a lower interest cost.
FHA loans also make it easier for borrowers who have experienced bankruptcy or foreclosure. However, a borrower who has gone through bankruptcy must wait two years to be eligible, while someone who’s gone through foreclosure must wait three.
The FHA 203(k) allows homeowners to roll the cost of renovations back into the mortgage. The loan is then based on what the property value will be after the improvements.
Although FHA loans make it easier to buy a home, they are not the right fit for everyone. One of the setbacks for those looking to borrow is private mortgage insurance (PMI). This is an insurance taken by the lender in the case of foreclosure and is a cost against the borrower usually paid on a month to month basis.
PMI is a requirement for any loan less than 20% of the purchase price. Of course, this is offset with FHA’s lower down payment plan. PMI will continue until the loan balance reaches 80% of the initial loan value.
Even with the potential hurdles associated with FHA loans, they remain a viable loan program for those looking to own a home for the first time. Borrowers should shop around for the lender loan that then means their needs.